What is this article about?
Companies experience countless claims every day – a broken machine, damaged goods or an incident in production. But when it comes to settling liability claims, many victims are in for a surprise: the compensation often falls short of expectations. Why is that? One of the most common reasons is the so-called new for old deduction. This deduction ensures that the increase in value through repair or renewal is taken into account when making compensation. In this way, the insurer ensures that the injured party is compensated but does not gain any financial advantage from the damage. But what exactly does the new for old deduction mean? When and why is this deduction made, and what does it mean specifically for companies?
This article examines the mechanisms and logic behind the new-for-old deduction and uses concrete examples to show how it works in practice – an important read for anyone who wants to be prepared in the event of a claim.
This deduction is often also called benefit deduction and concerns liability.
What does liability damage mean?
A liability claim is a loss for which someone is held liable because their actions or omissions have caused damage to another person or company, their property or assets. The term “liability” refers to the legal obligation to pay for damages caused when there is a breach of duty of care or negligence.
Examples of liability damages include:
- Property damage: Damage to third-party property, for example if a supplier damages a company’s conveyor belt during delivery.
- Financial loss: Financial damage caused by an action. In the case of technical damage, for example, it is loss of production because machines are destroyed.
- Personal injury: When a person is injured by a third party.
As a rule, liability insurance is taken out to cover the costs of such damage if the person who caused the damage has liability insurance. For companies, this is business liability insurance that is specifically tailored to their risk area, such as in the manufacturing industry or for special services.
What does the new for old deduction mean?
BGB §249 (1) states:
Anyone who is obliged to pay compensation must restore the situation that would have existed if the circumstance requiring compensation had not occurred.
If, as part of a liability for damages, a used item is replaced by a new item or repaired by installing new parts, this can lead to an increase in value.
The difference between the new item and the damaged used item is the value advantage, which must be taken into account in the settlement.
Thus, after a liability claim, the difference between the new and the damaged item is the value advantage. This difference must generally be compensated by the injured party. When settling the claim, this results in the deduction of new for old.
Simple example of the deduction new for old
A new car tire has a tread depth of 8 mm. The minimum tread depth in Germany is 1.6 mm. An accident damaged a tire of the same type with a tread depth of only 5.0 mm and it needs to be replaced. In this case, it is obvious that there is a linear relationship between loss of value and use.
In this very simple example, the loss in value would be calculated as follows:
Loss = 1 – 5/(8-1.6) = 0.219.
In the event of damage, there was a loss of value due to use of 21.9%. The new value would be reduced by exactly this 21.9% through the new for old deduction.
Deduction new for old calculation for machine damage
The current value is particularly important in the case of liability damage , because this is the only maximum amount that will be reimbursed. The current value is therefore a synonym for the deduction of new for old in the case of liability damage. It can also become important in property insurance.
determination of the current value
According to the definition
There are several methods to determine the time value . If the acquisition value or the new value is known, three methods are available to determine the devaluation.
time value factor
Three different valuation methods are used for machines, systems and operating equipment in general:
- Geometric-degressive depreciation with varying depreciation during the useful life and high depreciation at the beginning.
- Linear depreciation with the same depreciation amount until the residual value is reached at the end of the useful life.
- Arithmetic-degressive depreciation , whereby at the beginning of the useful life the depreciation is greater than after linear depreciation but not as strong as after geometric-degressive depreciation.
used value factor
The current value of a machine is determined not only by the current value factor (ZWF) but also by the used value factor (GBF). During on-site inspections, knowledge gained about equipment scope (accessories), condition, overhauls, repairs performed, and quality of work are included in this factor.
Therefore, their classification in an evaluation scheme is necessary, which, due to the diversity of objects, cannot be uniform, but must be adapted depending on their nature and the requirements placed on them with respect to the factors mentioned.
Some classic questions are:
- Is the machine in the retracted state?
- Does the machine meet the set requirements?
- Can the machine only be used for certain jobs?
- Have there been any repairs and maintenance?
Fair value
The current value of a machine is determined on the valuation date from the new value and the used value factor. Alternatively, it is determined from the acquisition value, taking into account price increases, and the used value factor.
Machine damage: deduction "new for old" liability damage
In the event of liability damage, at least the current value is always regulated. The deduction is then calculated as follows:
Deduction new for old = new value – current value.
If there is still a residual value of the damaged item for the claimant, this will also be deducted.
The difference between current value and replacement value
The current value and the replacement value are both important in the insurance industry when it comes to settling liability claims.
The current value has already been explained. The replacement value is defined as follows:
In practice, the
Replacement value often higher than the current value,
because it reflects the market value of a new or equivalent used item and does not take into account the ageing of the original item.
It is therefore important to determine the replacement value in the liability claim. If this is not possible, the
time value for regulation
used.
examples
collision with a conveyor belt
Picture 2 shows a classic example of damage. Truck drivers often forget to lower the trough and then drive through an industrial area with the trough raised. The next conveyor system in the direction of travel is usually significantly damaged by a collision and may even be completely destroyed.
In the case of destroyed conveyor systems, a precise distinction must be made. Often the conveyor and its components, such as the support rollers, are damaged and need to be replaced. These are classic wear parts, so the new for old deduction obviously does not need to be taken into account.
Basically, it must be checked whether the replacement of parts and components actually results in an increase in value. So if the steel structure of a conveyor system has to be partially replaced, it must be checked how high the current value is and whether it could possibly be a total economic loss. However, if there is no increase in value through the replacement, the insurer will generally not be able to deduct anything from the liability claim.
Experts are also needed to make a technical assessment. The insurance clerk can then legally assess the expert’s findings in accordance with the underlying insurance contract. In the case of major damage, internal lawyers usually carry out the legal assessment.
Damaged lifting platform
Picture 3 shows a very old, destroyed car lift. This lift was also settled as part of a liability claim.
In this case, the repair costs have exceeded the current value. This means a
economic total loss
In the case of a total economic loss, the current value is often regulated. If there is a residual value, this is also deducted.
In this case, the replacement value could not be determined precisely because the lifting platform was very old. A similar lifting platform was offered on an internet portal. The price offered was in the order of magnitude of the current value. The injured party was ultimately compensated with this.
The Role of Expert Opinions in Claims Settlement
Insurance companies often rely on experts to settle claims. However, publicly appointed and sworn experts are often called in, particularly in the case of complex liability claims. These independent experts are specially qualified and stand for neutrality and professional competence. Their use brings an additional level of credibility and is often necessary when the amount and cause of the damage in a liability case must be determined objectively and as accurately as possible.
As soon as the question of liability has been clarified, the specialists will work on determining the amount of damage. The current value and the replacement value are key factors in liability damage. While the current value reflects the current value of the damaged object, taking into account age and wear and tear, the replacement value represents the amount that would be required to replace it with an equivalent item.
In addition, the new for old deduction is made, an important mechanism to adequately take into account the residual value of the damaged machine or component in the event of a claim. This deduction ensures that the compensation is fair by adjusting the new value of the damaged item.
However, experts are not only commissioned by insurance companies. They often also act on behalf of the injured party in the event of a claim in mechanical engineering. Here they support companies – often production companies – that want to assert their claims in the event of a claim.
The experts undertake the task of determining the cause and the exact extent of the damage on behalf of the injured party so that the injured party can enforce his claims against the person responsible in court or out of court. In such cases, the costs for the expert commissioned by the injured party usually represent
a damage item
and will also be covered by the policyholder’s liability insurer as part of the claim settlement.
The work of the experts is therefore a central component in claims management, which is of great benefit not only to the insurance company, but also to the injured party. Through their expert and objective assessment, they lay the foundation for claims to be handled fairly, completely and professionally.
Conclusion
If damage occurs in a manufacturing company, the surprise is often great – and rarely pleasant. This is because machines, systems and other operating equipment are often directly affected, which can have a serious impact on production and even partially paralyze operations. Once it is established who is responsible for the damage, the injured parties expect the liability insurer of the person responsible to cover the costs in full. But this is precisely where many people experience an unpleasant surprise: the repair costs or replacement costs are not always paid in full. A deduction is often made for new for old.
This new for old deduction, which is based on the German Civil Code (BGB), is legally sound provided it has been calculated correctly. It is intended to ensure that the injured party is not better off than before the damage occurred. When an older machine is replaced, there is an increase in value that is offset by the new for old deduction – a benefit deduction that many do not expect and which often leads to conflicts.
In order to avoid being disadvantaged in the event of damage, companies should seek advice from an independent expert at an early stage. This expert can objectively determine both the extent of the damage and the cause and help the company affected to assert legitimate claims fully and correctly. The expert’s costs are almost always also covered by the person responsible or their insurance company – a step that pays off in order to avoid unpleasant surprises in the event of damage.
Recommendation:
If your company has been damaged by third parties, bring in an independent expert to represent your interests.
